The world's second largest iron ore miner Rio Tinto's $3 billion expansion of a Pilbara mine has been approved by the Western Australian government.

More than 1500 construction jobs would be created, nearly tripling iron ore operations at the Nammuldi mine and building a new 130 megawatt power station at nearby Cape Lambert, from where the ore will be shipped.

There would be ongoing employment for more than 700 people, WA Premier Colin Barnett said in a statement.

The expansion would see iron ore mined below the water table and production increased from eight to 23 million tonnes a year.

Surplus water extracted from the mine would be used for hay production, providing stock feed.

The power station will provide extra power to meet port needs.

Rio has invested about $US20 billion ($19.28 billion) over the next five years to increase production in two stages: from a current capacity of 230 million tonnes a year to 290mt in 2013 and to 360mt by 2015.

According to the government, iron ore production contributed $61 billion to the Western Australian economy in 2011-12, including more than $3.8 billion in royalty payments to the state government.